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Sunday, June 24, 2012

Friday's outlook expected a small rally, and the market traded right into Friday's rally target zone. But before I get too much into the short term, let's see where we are in the big picture.

Long Term Outlook

The projection shown below is what I believe is unfolding, but this big picture count is by no means a "done deal" yet, and bears have a few things left to accomplish to add some more confidence to this projection. One key confidence builder would be a break of the red uptrend line from the March 2009 lows; and the next confidence builder would be to see the current (assumed) third wave down knock out the December 2011 lows. Then we'd like to see wave (1) knock out the October 2011 lows.

The last time I published this chart was May 11--when
I also departed from the charts a bit and outlined some of the fundamental
challenges facing the world.Anyway, as
they say, "so far, so good” – at least in terms of the projections; not so
much in terms of the world.

Let's look at this chart another way, without the projections -- and then let's ask ourselves, is the type of severe long-term decline I'm projecting even possible? The charts say: absolutely.

Long-time readers will recall several times I've pointed to trading ranges in the past, and projected the market to move through them rapidly -- which it usually does. The simple theory here is that the more often the market trades through a particular price point, the weaker support and resistance become at that price point. The chart below discusses the rest.

Here's another quick glance at a chart (the NYSE Composite/NYA) that says an extended decline is quite possible -- again: provided bears can break the uptrend off the 2009 lows (which I believe they will).

To sum up the long-term outlook: I believe bears are now in control for the long haul. Assuming bears break the uptrend lines, it appears quite likely that the market is in for an extended decline. Of course, the bulls can still do some things to cast doubt upon it: Trade back above 1422 SPX would require this outlook to be re-examined.

Intermediate Term Outlook

Let's zoom in a bit and take a look at what's likely to occur on a slightly smaller scale. The market still has two main options here, but based on the retracement levels hit (61.8%), I am favoring the first outcome by a 75% margin.

As mentioned, the onset of wave (iii) hasn't been confirmed yet, and there are still some options for bulls over the near term. The first key is for the B-wave low of 1306 to get knocked out. That would rule out the alternate (x)-wave count shown below, which I'm currently handicapping at 25% odds. Note the 190 point bearish trade trigger.

Let's also take a look at a key related market: the US dollar. My dollar projections have played out well recently; below is the chart I published on April 15. My confidence at that moment was only medium -- but confidence grew after the red e-wave bottom.

This chart has evolved a bit over time, and in early May, when my confidence in this projection increased, I added additional price targets. It really is uncanny how well the chart above has played out -- note how it's followed the blue line projection perfectly since April 15, and also came within 6 cents of reaching the first target (mentioned in the chart above) for a breakout move of 3.68. If you bought near the e-wave bottom, you captured a profit of $4000-$5000 per DX futures contract.

Below, a look at the Dollar's monthly chart (although technically this belongs in the long-term outlook section, I wanted to keep all the Dollar charts together).

Short Term Outlook

The short-term is never as "easy" for these updates to contend with as the bigger picture. Short-term trading requires far more in the sense of real-time market reads, and what looks likely at the close of one day can suddenly appear completely out of the question five minutes after the next day's open. Nevertheless, I make a go of it every day, and Friday's short-term outlook was a dead-on hit.

The charts below outline the outcome which seems most probable over the short-term, along with some things to watch. There are two alternate potentials over the short term, both of which are plausible. The first is that the complete ABC pattern is simply wave A of (4). The second is that this is a higher degree wave (2) rally, and could stretch on a bit longer than anticipated, or lead to a deeper decline than anticipated.

I suspect that wave 4 is probably correct and that it completed right where I projected it would, at 1337. If so, then new lows should now follow directly. Obviously, trade back above the 1337 highs would indicate one of the alternate short-term counts was playing out.

Below is the one-minute SPX chart.

Finally, a number of readers have asked where a good level to get back into a Chevron (CVX) short would be, so I have outlined a bearish sell trigger on the CVX chart below. I believe CVX just completed an ABC rally for a nested second wave. If this outlook is correct, it's in for a rapid decline in the near future.

In conclusion, it appears likely that Minor wave (iii)-down of Intermediate wave (1)-down is now underway. We'll continue to watch key levels, to either build confidence in this view or to rule it out. The market has stayed on track with my overall projections for the past several months, so there's little reason for me to doubt this outlook at the moment. Trade safe.

PL, the "big picture" is interesting because it hard to believe that less than 20 years ago SPX was trading so much lower than today, and even a decade ago we were around 700, not 1310. Considering the vast sums of fiat dollars flushed into the "system" by the Fed, TARP, etc over the years, is it really possible that SPX can collapse back down? How can all that liquidity be destroyed when Bernanke and his ilk are "managing" they financial system?

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